Question 1

Small Investors Berhad, a large foreign mutual fund, is considering investing in stocks on Bursa Malaysia. One of the portfolio managers, Mr. Ramy, has identified two stocks, Sore and Durby, which have great potential and are considered blue-chip stocks. As a new investor in the local market, Mr. Ramy approached you to advise him on which one of the two stocks should be selected. He provides you with the following information for analysis.

• Calculate the expected return and standard deviation for both stocks. Advise Mr. Ramy on the investment he should choose.
• Calculate the covariance between the two stocks.
• Calculate the expected return and standard deviation of a portfolio consisting of 60% Sore and 40% Durby.

  • Question 2

    Amanda Tan cannot decide whether to invest in Stock Hewlett or Stock Packard or in a portfolio that is a combination of both stocks. She has approached OSK Securities and the firm has provided her with the following information:

    

    Using these stocks, she has identified two investment portfolio alternatives :

    

    a) Calculate the portfolio return and standard deviation for each alternative.

    b) Based on the findings above, which of the two alternatives would she choose? Explain your answer.

    Question 3

    John currently has a portfolio of shares giving a return of 20% with a risk of 10%. He is considering a new investment which gives a return of 20% with a risk of 12%. The coefficient of correlation of the new investment with his existing portfolio is +0.2. The new investment will comprise 40% of his enlarged portfolio. Should he invest in the new investment?